Sponsor Message:
Civil Aviation Forum
My Starred Topics | Profile | New Topic | Forum Index | Help | Search 
China Eastern Defaults On Fuel Hedges  
User currently offlineSpinner145 From Hong Kong, joined Jan 2008, 63 posts, RR: 0
Posted (4 years 10 months 3 weeks 3 days 16 hours ago) and read 6271 times:

BEIJING, Sep 08, 2009 (SinoCast Daily Business Beat via COMTEX) -- CEA | Quote | Chart | News | PowerRating -- China Eastern Airlines Corporation Ltd. (SHSE: 600115), a state-owned air carrier in the country, has gained support from the regulator behind the state-owned companies to terminate the financial derivative contracts with some foreign investment banks.

In a statement unveiled on September 7, the State-owned Assets Supervision and Administration Commission (SASAC) told foreign commodity hedging service providers that the state-backed players involved in commodity hedging operation were entitled to unilaterally default on derivative contracts signed previously...

http://www.tradingmarkets.com/.site/...ck%20News/2515429/?relatestories=1

Sorry I can't find a better link, the article above merely relays a report from China's state-owned press attempting to justify the state's support of China Eastern breaking its fuel hedging contracts. There were interesting articles about this in the South China Morning Post and the Asia Wall St. Journal, but neither have free online content.

Basically China Eastern now has state sanction to renege on bad hedging bets it made. The banks (who took just as much risk as the airlines did) will have pretty much no way to get the money owed them. This is because although hedging contracts are typically subject to international arbitration, no court in China would enforce an international arbitral decision once a state organ has announced its intentions this way.

While the banks are getting screwed, ultimately this will hurt Chinese businesses and airlines even more. You can be sure it's going to be a lot tougher and more expensive for Chinese airlines to secure any fuel hedge agreements in the future. Sadly it seems that contracts with politically connected Chinese businesses are useful primarily as low quality toilet paper.

62 replies: All unread, showing first 25:
 
User currently offlineBobnwa From United States of America, joined Dec 2000, 6449 posts, RR: 9
Reply 1, posted (4 years 10 months 3 weeks 3 days 16 hours ago) and read 6262 times:



Quoting Spinner145 (Thread starter):
no court in China would enforce an international arbitral decision once a state organ has announced its intentions this way.

Do you know that as fact, or it that just an off the wall comment?


User currently offlineSpinner145 From Hong Kong, joined Jan 2008, 63 posts, RR: 0
Reply 2, posted (4 years 10 months 3 weeks 3 days 16 hours ago) and read 6227 times:

Quoting Bobnwa (Reply 1):
Do you know that as fact, or it that just an off the wall comment?

It's pretty much a fact. I work as a finance lawyer in Asia, and nobody has any confidence whatsoever in the Chinese courts. If you're a non-Chinese in a commercial dispute with a Chinese person or business, the courts won't help you. There are countless cases where Chinese courts have (despite China being a signatory to international aribtration conventions) just kicked around these arbitral awards for years until the issue somehow went away (usually because the person just gives up).

[Edited 2009-09-09 08:41:29]

User currently offlineZeke From Hong Kong, joined Dec 2006, 8872 posts, RR: 75
Reply 3, posted (4 years 10 months 3 weeks 3 days 16 hours ago) and read 6219 times:



Quoting Spinner145 (Thread starter):
There were interesting articles about this in the South China Morning Post and the Asia Wall St. Journal, but neither have free online content.

I read the SCMP articles, it sounds like a bit of a two way bluff to me, I do not think they will end up paying all their obligations.

Quoting Spinner145 (Thread starter):
The banks (who took just as much risk as the airlines did) will have pretty much no way to get the money owed them.

The can impound aircraft outside at ports outside China, or basically make it impossible for the airline to buy any fuel, have any credit, or to transfer funds internationally. The hedging contracts are internationally enforceable. Also the airline leases a number of aircraft, if they default on a hedge, you can bet the lease companies will remove the aircraft very quickly as well.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently offlineHuaiwei From Singapore, joined Oct 2008, 1113 posts, RR: 2
Reply 4, posted (4 years 10 months 3 weeks 3 days 16 hours ago) and read 6215 times:

http://www.forbes.com/feeds/ap/2009/...-china-fuel-contracts_6855185.html

The commission "supports use of all legal measures to minimize losses through negotiation and position management" and "reserves the right to pursue lawsuits,"

Does Chinese law permit renegotiation of contracts?



It's huaiwei...not huawei. I have nothing to do with the PRC! :)
User currently offlineSpinner145 From Hong Kong, joined Jan 2008, 63 posts, RR: 0
Reply 5, posted (4 years 10 months 3 weeks 3 days 15 hours ago) and read 6161 times:



Quoting Zeke (Reply 3):

The can impound aircraft outside at ports outside China, or basically make it impossible for the airline to buy any fuel, have any credit, or to transfer funds internationally. The hedging contracts are internationally enforceable. Also the airline leases a number of aircraft, if they default on a hedge, you can bet the lease companies will remove the aircraft very quickly as well.

Yes, but no commercial bank is going to risk ticking off the government of the PRC by doing any of those things. Can you seriously imagine Goldman Sachs, for instance, endangering all of its investments relating to China by trying to seize a Chinese airliner that lands on US soil? Can you imagine the international row that would create? And even though the hedging contracts are enforceable internationally, you have to have the cooperation of the government where the assets are located to enforce if a counterparty is defaulting.

What I do see happening is hedging becoming a lot tougher and a lot more expensive to get for Chinese companies (airlines included).


User currently offlineZeke From Hong Kong, joined Dec 2006, 8872 posts, RR: 75
Reply 6, posted (4 years 10 months 3 weeks 3 days 15 hours ago) and read 6113 times:



Quoting Spinner145 (Reply 5):
Can you seriously imagine Goldman Sachs, for instance, endangering all of its investments relating to China by trying to seize a Chinese airliner that lands on US soil?

But it would not be Goldman Sachs seizing the aircraft, it would be the bailiff, i.e. the US court system, that would be a last resort, first resort would be to stop them from obtaining fuel until the account is paid, which effectively grounds them anyway, and costs them money in additional parking and lost revenue.

Quoting Spinner145 (Reply 5):
And even though the hedging contracts are enforceable internationally, you have to have the cooperation of the government where the assets are located to enforce if a counterparty is defaulting.

Airlines normally have some assets, ticket office etc in countries they fly.

Quoting Spinner145 (Reply 5):
What I do see happening is hedging becoming a lot tougher and a lot more expensive to get for Chinese companies (airlines included).

I can see the facility being removed all together, which in the long term would make the airline non-competitive.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently offlineAcelanzarote From Spain, joined Nov 2005, 821 posts, RR: 0
Reply 7, posted (4 years 10 months 3 weeks 3 days 15 hours ago) and read 6080 times:

So the long and short of this is that they (CES) may have shot themselves
in the foot, unknowingly perhaps!!!
Question is how much this may affect other Chinese Airlines I guess..



from the Island with sun and great photo's.. Why not visit Lanzarote
User currently offlineMax999 From United States of America, joined Dec 2005, 1028 posts, RR: 0
Reply 8, posted (4 years 10 months 3 weeks 3 days 14 hours ago) and read 5960 times:

Quoting Spinner145 (Reply 2):
It's pretty much a fact. I work as a finance lawyer in Asia, and nobody has any confidence whatsoever in the Chinese courts.

I'm not a risk expert, but I assume that this would be type of sovereign risk...am I right? Do you know if anyone has done a study linking credit risk with sovereign risk when working with state owned enterprises in China?

I think it would also be very interesting to see if sovereign risk can be quantified.

[Edited 2009-09-09 10:22:38]


All the things I really like to do are either immoral, illegal, or fattening.
User currently offlineHuaiwei From Singapore, joined Oct 2008, 1113 posts, RR: 2
Reply 9, posted (4 years 10 months 3 weeks 3 days 8 hours ago) and read 5727 times:



Quoting Acelanzarote (Reply 7):
So the long and short of this is that they (CES) may have shot themselves
in the foot, unknowingly perhaps!!!

If you read around, it appears even the airlines themselves are unaware of this new "initiative" yet. It appears to be a top-down order, and not a response to a request by the airlines themselves.



It's huaiwei...not huawei. I have nothing to do with the PRC! :)
User currently offlineSpinner145 From Hong Kong, joined Jan 2008, 63 posts, RR: 0
Reply 10, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5604 times:



Quoting Zeke (Reply 6):
But it would not be Goldman Sachs seizing the aircraft, it would be the bailiff, i.e. the US court system, that would be a last resort, first resort would be to stop them from obtaining fuel until the account is paid, which effectively grounds them anyway, and costs them money in additional parking and lost revenue.

Airlines normally have some assets, ticket office etc in countries they fly.


I can see the facility being removed all together, which in the long term would make the airline non-competitive

I think the point here is that China Eastern wants to be out of their current hedging arrangements. It sounds like they made long-term hedging arrangements near the top of the most recent oil spike, thinking oil was probably going up even more in the next few years. When things went the other direction, the hedging contracts were suddenly costing them a lot of money. Now obviously if there was no other way they could get oil, they wouldn't break those hedging contracts, but these days it would probably be cheaper even to buy it on the spot market than to stick with a contract made 15 or so months ago. No bank will be able to close the spigot, and even if they can't enter into international hedging arrangements, I doubt they would have broken the contract without some assurance that they will still be able to secure fuel.

Plus, as the article took pains to point out, the ones losing out will be the "foreign (i.e., non-Chinese) investment banks".

And given that China Eastern flies primarily within Mainland China and that it seems like a multi-billion dollar loss to the banks, I doubt the banks would be able to locate anywhere near enough assets outside of the PRC to cover their losses from China Eastern reneging on its agreements.

So they're probably safe in the short term and I'm sure think they've screwed over the greedy "foreign investment banks". But in the long term it's going to increase the costs for all Chinese airlines and other industries if they can, with government protection, just walk away from contracts they no longer like.


User currently offlineFlylku From United States of America, joined Apr 2006, 800 posts, RR: 0
Reply 11, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5582 times:



Quoting Spinner145 (Thread starter):
While the banks are getting screwed, ultimately this will hurt Chinese businesses and airlines even more. You can be sure it's going to be a lot tougher and more expensive for Chinese airlines to secure any fuel hedge agreements in the future.

BIG, BIG, BIG mistake. Can you imagine JAL or Korean or Singapore Air doing this? No. Those airlines will have a competitive advantage over any Chinese airline for years to come.

I will look for this in the Wall Street Journal tomorrow;s but this sounds like a major story that goes way beyond the airline industry and has major implications for any Chinese business.



...are we there yet?
User currently offlinePellegrine From United States of America, joined Mar 2007, 2362 posts, RR: 8
Reply 12, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5575 times:

Interesting.

Another issue in all this may be that some of these derivatives contracts are extremely poorly worded and the side buying them (the airline in this case) may not fully understand the contract, while the western bank selling it pushes these as solutions to business problems. What I mean is that the downside for the client is not protected very well nor explained to them, because if they go upside down the bank stands to reap significant rewards. All is well and good until the contract blows up in their face and they lose tens of millions/hundreds of millions/billions. A bit like picking up nickels in front of a steamroller, as the much used phrase goes. There was a fairly well known case a few years ago in Indonesia of this, that went to arbitration though. Don't know if this is the case here.

This line is good:
"Looking ahead, China Eastern will make conducts regarding its commodity hedging business public in the future, said Liu Shaoyong, chairman for the Shanghai-listed company, suggesting domestic firms like China Eastern to beef up their risk management capacity before setting foot in the international capital market. "

As a business you definitely cannot rely on an investment bank to give you all the information you require, especially if they are your counterparty.



oh boy!!!
User currently offlineCommavia From United States of America, joined Apr 2005, 11439 posts, RR: 61
Reply 13, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5552 times:



Quoting Pellegrine (Reply 12):
Another issue in all this may be that some of these derivatives contracts are extremely poorly worded and the side buying them (the airline in this case) may not fully understand the contract, while the western bank selling it pushes these as solutions to business problems. What I mean is that the downside for the client is not protected very well nor explained to them, because if they go upside down the bank stands to reap significant rewards. All is well and good until the contract blows up in their face and they lose tens of millions/hundreds of millions/billions. A bit like picking up nickels in front of a steamroller, as the much used phrase goes. There was a fairly well known case a few years ago in Indonesia of this, that went to arbitration though. Don't know if this is the case here.

This line is good:
"Looking ahead, China Eastern will make conducts regarding its commodity hedging business public in the future, said Liu Shaoyong, chairman for the Shanghai-listed company, suggesting domestic firms like China Eastern to beef up their risk management capacity before setting foot in the international capital market. "

As a business you definitely cannot rely on an investment bank to give you all the information you require, especially if they are your counterparty.

Absolutely no way. We're not talking about some young, inexperienced couple going to get a mortgage for their first house from an unscrupulous broker who says they can afford a $600,000 house on their $45,000 combined annual salary.

We're talking about a multi-billion-dollar corporation owned largely by organs of the Chinese government, itself one of the world's largest shell corporations.

There is no way there weren't mountains of lawyers and government bureaucrats who reviewed these hedging contracts before they were signed, and their is absolutely no way that China Eastern did not "fully understand" them.

Of course they did. As others have said - they just don't like how the outcome of the hedge turned out, and thus they are using that metaphor for Chinese business ethics by just refusing to live up to the contract. After all, as another poster said, the banks who made these contracts know full well that pushing this issue further with a Chinese court will: a) get them nowhere, and b) anger the government of the world's most populous nation and largest single consumer market. Not gonna happen.

Sadly, I fear this outrageous action will go largely unpunished, just like most of the other horribly unethical things that go on in China. I do hope that every bank on earth, however, refuses to hedge with Chinese airlines, forcing these airlines to instead use Chinese state banks for this hedging. That way, the winner and the loser are both the same person, and there isn't another entity to dump the trading loss on.


User currently offlineSpinner145 From Hong Kong, joined Jan 2008, 63 posts, RR: 0
Reply 14, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5532 times:

Quoting Max999 (Reply 8):
I'm not a risk expert, but I assume that this would be type of sovereign risk...am I right? Do you know if anyone has done a study linking credit risk with sovereign risk when working with state owned enterprises in China?

I think it would also be very interesting to see if sovereign risk can be quantified.

Neither am I a risk expert but I do not that investors definitely value risks when considering invvestments in China. I can tell you that most investors view China as something of a black box, and don't put any faith in the likelihood of ever being able to recover anything through the Chinese courts. They only bank on value once something is safely outside of Chinese national boundaries.

Quoting Pellegrine (Reply 12):
Another issue in all this may be that some of these derivatives contracts are extremely poorly worded and the side buying them (the airline in this case) may not fully understand the contract, while the western bank selling it pushes these as solutions to business problems. What I mean is that the downside for the client is not protected very well nor explained to them, because if they go upside down the bank stands to reap significant rewards. All is well and good until the contract blows up in their face and they lose tens of millions/hundreds of millions/billions. A bit like picking up nickels in front of a steamroller, as the much used phrase goes. There was a fairly well known case a few years ago in Indonesia of this, that went to arbitration though. Don't know if this is the case here.

This line is good:
"Looking ahead, China Eastern will make conducts regarding its commodity hedging business public in the future, said Liu Shaoyong, chairman for the Shanghai-listed company, suggesting domestic firms like China Eastern to beef up their risk management capacity before setting foot in the international capital market. "

As a business you definitely cannot rely on an investment bank to give you all the information you require, especially if they are your counterparty.

Actually hedging contracts are pretty bread and butter and very well understood.

Of course you can't rely on the banks to protect your interest, they are there doing the exact same thing the airline is doing: making a bet about where the market will go. If the banks had bet wrong they would be the ones out a lot of money, and these guys from China Eastern would be drinking cognac toasting their business acumen. Instead they took a big bet and lost, and now they are saying that they don't have to pay up, and the government is protecting them rather than making sure they keep their promises.

And the quote you mention doesn't give me any comfort. China Eastern is admitting that they're not following through on their obligations, but they promise that next time they'll be more careful and then they'll be sure to follow through. Color me unimpressed by such promises.

[Edited 2009-09-09 19:32:30]

User currently offlineAllegro From United States of America, joined Mar 2009, 236 posts, RR: 1
Reply 15, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5508 times:

Will the Chinese central government step and pay the off the hedge contracts? That would not be unusual in these times. Lets hope so. Reneging on these type of contracts may have a chilling effect on a nascent world-wide recovery, by forcing financial companies to re-trench and withhold credit even more.

The whole idea of not paying for your mistakes is just distasteful. MU be an adult and own up to your decisions.



Flown on: DC-3, DC-8, DC-9, DC-10, MD-11, MD-80, MD-90, 707, 717, 727, 737, 747, 757, 767, 777, A300, A310, A320, A330,
User currently offlinePellegrine From United States of America, joined Mar 2007, 2362 posts, RR: 8
Reply 16, posted (4 years 10 months 3 weeks 3 days 5 hours ago) and read 5503 times:



Quoting Commavia (Reply 13):

Absolutely no way. We're not talking about some young, inexperienced couple going to get a mortgage for their first house from an unscrupulous broker who says they can afford a $600,000 house on their $45,000 combined annual salary.

We're talking about a multi-billion-dollar corporation owned largely by organs of the Chinese government, itself one of the world's largest shell corporations.

There is no way there weren't mountains of lawyers and government bureaucrats who reviewed these hedging contracts before they were signed, and their is absolutely no way that China Eastern did not "fully understand" them.

Of course they did. As others have said - they just don't like how the outcome of the hedge turned out, and thus they are using that metaphor for Chinese business ethics by just refusing to live up to the contract. After all, as another poster said, the banks who made these contracts know full well that pushing this issue further with a Chinese court will: a) get them nowhere, and b) anger the government of the world's most populous nation and largest single consumer market. Not gonna happen.

I tend to disagree. But then I never take lawyers and bankers at face value. Just because they are state owned and have corporate armies at their disposal does not mean they didn't know what they were getting into. Note, I did not say this excuses their intentional default, or that this was indeed the case.

To think predatory business does not happen in the international capital arena, and only on a consumer/retail level, is naive when there are many notable cases in the past.

The outcome of this will be...business as usual.

Everyone wants to do business in China. This won't change because of one default.

Quoting Spinner145 (Reply 14):
Actually hedging contracts are pretty bread and butter and very well understood.

Depends which ones we are talking about of course. OTC, they are not all standard, and are privately negotiated I am sure you know.

Quoting Spinner145 (Reply 14):
And the quote you mention doesn't give me any comfort. China Eastern is admitting that they're not following through on their obligations, but they promise that next time they'll be more careful and then they'll be sure to follow through. Color me unimpressed by such promises.

It made me laugh. They should have looked into risk management the first time, eh?



oh boy!!!
User currently offlineFlighty From United States of America, joined Apr 2007, 8408 posts, RR: 3
Reply 17, posted (4 years 10 months 3 weeks 3 days 4 hours ago) and read 5496 times:



Quoting Spinner145 (Reply 10):

Plus, as the article took pains to point out, the ones losing out will be the "foreign (i.e., non-Chinese) investment banks".

Not really. The real loser is Chinese companies who expect to do business internationally in the future.

Quoting Spinner145 (Reply 14):
China Eastern is admitting that they're not following through on their obligations, but they promise that next time they'll be more careful and then they'll be sure to follow through. Color me unimpressed by such promises.

Of course. You and the rest of the international community. If there is no power to collect debts in China, then that says something grave about their state of development.

This isn't about China Eastern. It's about the environment in which they live. That's why this is interesting.


User currently offlineIkramerica From United States of America, joined May 2005, 21474 posts, RR: 60
Reply 18, posted (4 years 10 months 3 weeks 3 days 4 hours ago) and read 5474 times:



Quoting Commavia (Reply 13):
Sadly, I fear this outrageous action will go largely unpunished, just like most of the other horribly unethical things that go on in China. I do hope that every bank on earth, however, refuses to hedge with Chinese airlines, forcing these airlines to instead use Chinese state banks for this hedging. That way, the winner and the loser are both the same person, and there isn't another entity to dump the trading loss on.

The world did not hold them to their pre-Olympic promises, so why wouldn't the Chinese government feel emboldened?



Of all the things to worry about... the Wookie has no pants.
User currently offlineSpinner145 From Hong Kong, joined Jan 2008, 63 posts, RR: 0
Reply 19, posted (4 years 10 months 3 weeks 3 days 4 hours ago) and read 5471 times:



Quoting Allegro (Reply 15):
Will the Chinese central government step and pay the off the hedge contracts? That would not be unusual in these times. Lets hope so. Reneging on these type of contracts may have a chilling effect on a nascent world-wide recovery, by forcing financial companies to re-trench and withhold credit even more.

The whole idea of not paying for your mistakes is just distasteful. MU be an adult and own up to your decisions.

I seriously doubt the Chinese government will do anything. You'll note that the article itself went to pains to point out that these were contracts with "foreign" banks, and that's the point. They don't want their guys to pay the foreigners.

China in recent months has become more and more brazen with things like this (think, for example, of the arrests of Rio Tinto executives as part of their negotiations for better iron-ore prices). The Chinese government follows one overarching rule when deciding how to deal with international business conflicts: make sure the the home team wins.


User currently offlineFlyLKU From United States of America, joined Apr 2006, 800 posts, RR: 0
Reply 20, posted (4 years 10 months 3 weeks 2 days 19 hours ago) and read 5254 times:

Similar article on C2 of the Sept. 10 Wall Street Journal. This kind of news is so damaging to Chinese commerce which has already suffered an image problem in recent years.


...are we there yet?
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 21, posted (4 years 10 months 3 weeks 2 days 18 hours ago) and read 5186 times:



Quoting Spinner145 (Reply 14):
I think it would also be very interesting to see if sovereign risk can be quantified.

Sovereign Risk is quantified all the time when trading sovereign debt - it shows up either as spread over treasury for bonds or shows up in the CDS spread.

The jurisdiction applicable will be defined in the the hedging contract.


User currently offlineGoaliemn From United States of America, joined Sep 2005, 463 posts, RR: 3
Reply 22, posted (4 years 10 months 3 weeks 2 days 18 hours ago) and read 5155 times:



Quoting Zeke (Reply 6):
But it would not be Goldman Sachs seizing the aircraft, it would be the bailiff, i.e. the US court system, that would be a last resort, first resort would be to stop them from obtaining fuel until the account is paid, which effectively grounds them anyway, and costs them money in additional parking and lost revenue.

Since the airline is, at least, partially owned by the Chinese government, could they claim it can't be seized by another government? Plus, would the Chinese then seize a US airliner once it lands in China? Granted, doing that would probably end most, if not all, international flights into China pretty damn fast.


User currently offlineMax999 From United States of America, joined Dec 2005, 1028 posts, RR: 0
Reply 23, posted (4 years 10 months 3 weeks 2 days 18 hours ago) and read 5135 times:



Quoting Pellegrine (Reply 16):

I tend to disagree. But then I never take lawyers and bankers at face value. Just because they are state owned and have corporate armies at their disposal does not mean they didn't know what they were getting into. Note, I did not say this excuses their intentional default, or that this was indeed the case.

To think predatory business does not happen in the international capital arena, and only on a consumer/retail level, is naive when there are many notable cases in the past.

Even if we assume the the investment bank sales teams made misleading statements, I have no sympathy for China Eastern. For a company that has over USD2.5 billion in revenue for 1H 2009, they should be sophisticated enough to have full understanding on how to protect themselves from any 'unscrupulous' bankers selling complex financial products. The company's lawyers and finance people should have warned they were being misled and not enter into these derivative contracts.

If senior management at China Eastern didn't understand what they got themselves into...I'd advise them to hire new counsel. Like Commavia said, China Eastern is not the same as a young couple being misled into a risky mortgage by some shady mortgage broker.



All the things I really like to do are either immoral, illegal, or fattening.
User currently offlineClickhappy From United States of America, joined Sep 2001, 9603 posts, RR: 69
Reply 24, posted (4 years 10 months 3 weeks 2 days 17 hours ago) and read 5009 times:
AIRLINERS.NET CREW
PHOTO SCREENER

My personal opinion is that this is a move by the Chinese government to break the back of some 'traditional' western banking firms. There is an ongoing shift away from US economic policy and the US dollar. China has recently been a net seller of US treasuries for the first time, and has agreed to buy bonds from the IMF not denominated in US dollars. China, Russia, and now the UN are also calling for a move from the US dollar.

I don't think it is lost on policy makers in the Chinese government that there was a huge run-up in oil prices ($150/barrel) and then they were offered hedges at $100/barrel, only to see prices drop to $40.

The big investment banks rape you, coming and going, with the biggest being Goldman Sachs, who posted a $3.5 Billion dollar profit in the latest quarter. They are making huge sums of money on the backs of others.

Think of it like Las Vegas. GS is the casino, customers like China Eastern are the gamblers.


25 PlaneAdmirer : So if the Chinese government can, in its sole discretion, back out of hedging contracts, what's to stop them from backing out of their committed order
26 Acelanzarote : What's to stop them paying the leasing fees on planes, if they don't leave China what would happen..... Where will it all end, almost as if China is f
27 Flighty : ? You could say that about anybody with lots of money. Nobody usually accuses Goldman Sachs of breaking their word. In fact their good word is part o
28 Max999 : While sovereign risk is applied to debt issued by governments, has the same measures used to calculate sovereign risk ever been applied to a Chinese
29 Clickhappy : The Chinese argument is that the they have entered contracts on these OTC derivatives that were created by western banks that knew they were flawed (u
30 DocLightning : I can seriously imagine it. It would send a very strong message to China that if you want to do business with the world, then you have to do business
31 B2468 : I absolutely agree with you here, and your point needs to be reiterated: many of these investment banks are just as slimy and dirty as the PRC Govern
32 Golfradio : I thought those were ABCP based derivatives. The fuel hedge contracts would be just futures, wouldn't it?
33 Clickhappy : They are just contracts. A straight hedge is a promise to buy something at a set price. Air China, Shanghai Airlines, and China Eastern have lost abou
34 Golfradio : Exactly, so there is no question of them being defrauded. They were not flawed like the mortgage based ABCPs. These guys just don't want to play fair
35 Glacote : Or so they hope. Investment bankers in particular are extremely rational. Everybody in the industry just hiked up the counterparty risk of even sover
36 Clickhappy : Doing further research I would say this threat by the Chinese government has less to do with fuel bills by state-run airlines and more to do with some
37 Lufthansa : Man the chinese dont play fair do they? Seriously, if china eastern get away with this its going to send a message to all chinese companies... like fo
38 Post contains links Allegro : Sorry, not even close ... they invenstment bankers have to play by the rules or they will be out of business. The current crisis was not created by t
39 Clickhappy : The Chinese airlines, and other state industries, are long oil, but the country is short in gold and silver. Lately the Chinese government has been en
40 GFFgold : I doubt this very much. They will more likely make encouraging noises about 're-negotiating' the contracts on more favourable terms. In China default
41 Spinner145 : Agreed. As I've pointed out previously, it is a pretty simple prospect for MU and the Chinese government. MU made a very bad bet on fuel. Fuel hedges
42 Spinner145 : A few points in response: 1) What evidence do we have here of bad faith dealing by the banks? As I and many others have pointed out, fuel hedges are
43 GFFgold : This is so true, and will be used as a convenient excuse for continuing to restrict domestic market access for foreign retail banks. And so 'business
44 Pellegrine : Interesting take, that is very funny to me. Maybe I should do business in China, I love games where you keep the other side second-guessing. In my vi
45 Lightsaber : This is huge. This default will ripple through the system. I recommend reading "The Lexus and the Olive Tree" and the follow on book "The world is fla
46 AirlineCritic : There and elsewhere. Scare your opponent, maybe the other guy folds and you'll get a better deal. And the larger company/country you have, the nastie
47 B2468 : Well, there isn't any evidence of bad faith dealing yet, which is why there needs to be a fair trial, if another agreement isn't made before then. Ev
48 B2468 : You're absolutely right, and I didn't say that China completely didn't need the West, but that China doesn't need the West as much as some Western co
49 413x3 : I think China wants everyone to believe they aren't dependent on the west, but time will show that to be incorrect when they have: 1. not enough buyer
50 B2468 : I am going to have to respectfully disagree here. I don't trust corporations any more than I trust a government, until I see full disclosure from bot
51 Spinner145 : The fact that there's no evidence of bad faith dealing is precisely the reason the contract needs to be enforced. There's really nothing 'tricky' any
52 B2468 : Anyhow, to bring this back a little more towards aviation... What would happen in a place like the USA or EU, where laws tend to be far more transpare
53 TheCol : In other words: the banks made their own beds and slept in them. They must have known that they were taking a huge risk by doing business with a stat
54 Borism : Wow, this is massive. Without taking any sides I think occurrences like this underline why the proclaimed World economic "recovery" is nowhere near. L
55 GFFgold : The boot was on the other foot earlier this year when Merpati (MZ) in Indonesia got into trouble over its contracts to buy a number of Xian commuter t
56 PVG : The Chinese government put banks on notice a few weeks ago that they were going to default on the derivative contracts. Most people seem to think that
57 LipeGIG : I work with risk, and have to say, besides the fact they will lose the margin deposits, all that will happen is that China will have to pay a very hi
58 Golfradio : I don't agree. You are just saying it's OK to break contracts just because everybody else seems to do it. The examples you have stated about the copp
59 Lightsaber : No one. They can break any rule/contract they want. But what happens if we close our ports? Who's to stop the US or Europe? In particular, it won't b
60 PVG : No, I'm not saying that it's ok to break contracts. I'm just saying that it happens everyday, it is not unique to China, and it's a risk of doing bus
61 Spinner145 : Agreed that no nation has a monopoly on greed, fraud or unethical business practices. What's notable in this case is the fact that the government is
62 PVG : I'm fairly certain that they have just but this out to see what they can negotiate to make the contract more palatable. China is party to the 1950 Ne
Top Of Page
Forum Index

This topic is archived and can not be replied to any more.

Printer friendly format

Similar topics:More similar topics...
Singapore Air To Buy China Eastern Stake On Sept. posted Tue Aug 28 2007 04:09:34 by Asiaflyer
NYTimes Posts Article On Southwest's Fuel Hedges posted Wed Nov 28 2007 20:39:21 by FATFlyer
Update On China Eastern JFK Service? posted Sun Jul 22 2007 10:58:08 by YVR1968
Service On China Eastern posted Sun Nov 27 2005 06:00:25 by Wdleiser
Strange Delays On China Eastern? posted Mon May 23 2005 16:19:17 by Dalavia
What's About The IFE On China Eastern? posted Thu Sep 23 2004 23:05:06 by BA007
Anyone Flown On China Eastern's A340-600s? posted Wed Jul 21 2004 18:31:44 by 22886
China Eastern Could Announce 7E7 Order On 18 June posted Mon May 31 2004 20:16:54 by Singapore_Air
Transpacific In J On China Eastern? posted Wed Jul 31 2002 20:30:56 by Djcrooks
China Eastern And Shanghai Air Update posted Sun Jul 12 2009 20:08:03 by AA1818